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EXAM FOCUS POINT
Purchases Sales
Statement of profit or loss
Irrecoverable input sales tax: include
Exclude sales tax
Recoverable input sales tax: exclude
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CHAPTER 13
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SALES TAX
229
PURCHASES DAY BOOK
Date Customer
Total
Purchase
Sales
tax
$
$
$
15 Mar 20X1
A Splier (Merchants)
184
160
24
When receivables pay what they owe, or payables are paid, there is no need to show the sales tax in an
analysis column of the cash book, because input and output sales tax arise when the sale is made, not
when the debt is settled.
However, sales tax charged on cash sales or sales tax paid on cash purchases will be analysed in a
separate column of the cash book. This is because output sales tax has just arisen from the cash sale
and must be credited to the sales tax payables in the ledger accounts. Similarly, input sales tax paid on
cash purchases, having just arisen, must be debited to the sales tax payable.
For example, the receipts side of a cash book might be written up as follows.
CASH BOOK (RECEIPTS)
Analysis columns
Output sales
Sales
Cash
tax on cash
Date
Narrative
Total
ledger
sales
sales
20X1
$
$
$
$
10 Feb A Detter & Sons
230
230
10 Feb Owen
660
660
12 Feb Cash sales
322
280
42
15 Feb Newgate Merchants
184
184
20 Feb Cash sales
92
80
12
1,488
1,074
360
54
The payments side of a cash book might be written up as follows.
CASH BOOK (PAYMENTS)
Analysis columns
Cash
purchases
Input sales
Purchase
and sun-
tax on cash
Date
Narrative Total
ledger
dry items
purchases
20X1
$
$
$
$
10 Apr A Splier (Merchants)
184
184
20 Apr Telephone bill paid
138
120
18
25 Apr Cash purchase of stationery
46
40
6
26 Apr Sales tax paid to tax authorities
1,400
1,400
1,768
184
1,560
24
QUESTION
Statement of profit or loss
Are trade receivables and trade payables shown in the accounts inclusive of sales tax or exclusive of
sales tax?
ANSWER
They are shown inclusive of sales tax, as the statement of financial position must reflect the total
amount due from receivables and due to payables.
EXAM FOCUS POINT
A small element of sales tax is quite likely in questions. It is worth spending a bit of time ensuring that
you understand the logic behind the way sales tax is accounted for, rather than trying to learn the rules
by rote. This will ensure that even if you forget the rules, you will be able to work out what should be
done.
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PART D: RECORDING TRANSACTIONS AND EVENTS
230
2.3 Payable for sales tax
An outstanding payable for sales tax will appear as a current liability in the statement of financial
position.
The sales tax paid to the authorities each quarter is the difference between recoverable input sales tax
on purchases and output sales tax on sales. For example, if a business is invoiced for input sales tax of
$8,000 and charges sales tax of $15,000 on its credit sales and sales tax of $2,000 on its cash sales,
the sales tax control account would be as follows.
SALES TAX CONTROL ACCOUNT
$
$
Payables (input sales tax)
8,000 Receivables (output sales
Cash (payment to authorities)
9,000 tax invoiced)
15,000
Cash (output sales tax on cash sales)
2,000
17,000
17,000
Payments to the authorities will not generally coincide with the end of the accounting period of a
business, and so at the reporting date there will be a balance on the sales tax control account. If this
balance is for an amount payable to the authorities, the outstanding payable for sales tax will appear as
a current liability in the statement of financial position.
Occasionally, a business will be owed money by the authorities. In such a situation, the sales tax refund
owed by the authorities would be a current asset in the statement of financial position.
QUESTION
Sales tax payable
A business in its first period of trading charges $4,000 of sales tax on its sales and suffers $3,500 of
sales tax on its purchases which includes $250 irrecoverable sales tax on business entertaining. Prepare
the sales tax control account.
ANSWER
SALES TAX CONTROL ACCOUNT
$
$
Payables
3,250
Receivables
4,000
Balance c/d (owed to tax authorities)
750
4,000
4,000
Balance b/d
750
EXAM FOCUS POINT
The ACCA examining team commented that in a past exam, a question on calculating and accounting
for sales tax had one of the lowest pass rates.
Specifically, some students accounted for sales tax on payments to credit suppliers.
This is incorrect, as the sales tax will have already been accounted for when the credit purchase was
recorded.
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CHAPTER 13
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SALES TAX
231
Sales tax – the main points
(a)
Credit sales (b)
Credit purchases
(i)
Include sales tax in sales day book;
show it separately.
(ii)
Include gross receipts from
receivables in cash book; no need to
show sales tax separately.
(iii)
Exclude sales tax element from
statement of profit or loss.
(iv)
Credit sales tax control account with
output sales tax element of
receivables invoiced.
(i)
Include sales tax in purchases day
book; show it separately.
(ii)
Include gross payments in
cashbook; no need to show sales tax
separately.
(iii)
Exclude recoverable sales tax from
statement of profit or loss.
(iv)
Include irrecoverable sales tax in
statement of profit or loss.
(v)
Debit sales tax control account with
recoverable input sales tax element
of credit purchases.
(c)
Cash sales (d)
Cash purchases
(i)
Include gross receipts in cash book;
show sales tax separately.
(ii)
Exclude sales tax element from
statement of profit or loss.
(iii)
Credit sales tax control account with
output sales tax element of cash
sales.
(i)
Include gross payments in cash
book: show sales tax separately.
(ii)
Exclude recoverable sales tax from
statement of profit or loss.
(iii)
Include irrecoverable sales tax in
statement of profit or loss.
(iv)
Debit sales tax control account with
recoverable input sales tax element
of cash purchases.
EXAM FOCUS POINT
In sales tax questions, remember to check the tax rate used. If you are required to calculate sales tax,
the rate will always be given.
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